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Tuesday, 30 January 2018

So an internal government report has been leaked that says whichever Brexit option the UK goes for there will be a detrimental effect on GDP. Depending on which form of Brexit we end up going for the range is from 2% of foregone GDP in 15 years up to as much as 8% of GDP in 15 years. Scary stuff.

Lots of people in the Remain camp seem to think that this is going to have an effect on the debate about Brexit now that the report is in the public domain. But I simply can't see how this will be the case.

For a minute let's just accept that what the report says is accurate. I know plenty of people will disbelieve it but I want to look at the effect on people who do believe it. Because if it does pan out the way the report says the effects of Brexit will be diffuse and spread out over many years.

Let's take the mid point. Let's say that in 15 years time GDP is 5% lower than it would otherwise have been. How are people going to know that it has happened and to quantify the effects on their lives?

Well what I am going to do here is a bit rough and ready but in 2016 (the last year we have relatively accurate figures for) UK GDP was 1,939 billion pounds. And in that year GDP growth was 1.8% on the previous year. So let's just hypothesise that for the next 15 years after 2016 growth ends up being 1.8% every year. That would mean by 2031 GDP would be:

1939 * 1.018^15 = 2534

That's 2,534 billion pounds in 15 years time. Or approximately 30.7% more than it is now.

Now let's factor in the 5% extra GDP that we won't get because of Brexit. So let's just say that growth instead across that period will actually only be 25.7%. Which means GDP will instead only be 2,437 billion pounds.

That is a big difference. It's nearly £100 billion that we will have foregone by 2031. That's roughly £1,500 for every person in the country.

However that is not how it will be felt. Let's reverse engineer this calculation to work out what the GDP growth figures would be on average in order to reach this lower number in 2031.

1939 * X^15 = 2437
Divide both sides by 1939

X^15 = 2437/1939 = 1.25683342

X = 15th Root of 1.256833419 = 1.01535641

In other words, instead of growth on average being 1.8% it will be 1.53%.

This is how it will be seen. In fact it is the only way it can be seen. In GDP figures.

The biggest hurdle is that there is no way of knowing for sure that growth would have been 1.8% without Brexit. That has to be taken on trust. But like I said even if you do accept it, what are people going to make of the fact that growth has been 0.3% lower than it would have been? You can't touch or taste it. It's just a hypothetical number in a spreadsheet. It will have almost no political cut-through for this reason.

If you doubt me, try this little experiment.

Find 5 people you know (who are not involved in politics or economics) and ask them what GDP growth was last year. I'd be very surprised if in the majority of cases the average margin of error from the answers was less than 0.3%.

1 comment:

AndrewZ
said...

I think you're right about this, but it's worth noting that the Brexit vote wasn't just about economic issues. It was also about issues of sovereignty, democratic accountability and cultural identity. So, it's not just a question of GDP being an intangible "number in a spreadsheet". It's also that many people (on both sides) didn't make their choice purely on the basis of an economic calculation and would therefore be likely to think that hypothetical arguments about GDP are entirely secondary to their real concerns.